Freitag, Oktober 30, 2009

In Days Of Old...

This struck me as indicative of the free ride that the Obama Administration continues to get from the Press.

Mrs. Clinton is, to be blunt, a loose cannon. She's condescending - a few days ago she spoke of terrorists as cowards and sounded anything but statesman like, sounding instead like a scolding teacher speaking to small children - and is, if anything, making things worse rather than better.

By going to Pakistan on a mission to explicitly improve relations and then to engage in mindless speculation as to why Pakistan isn't doing a better job is the sign of a number of serious errors:

1) Antagonizing a needed ally in public for little or no reason;

2) Criticizing the Pakistani for trying to balance their own national security interests - that the population in the Tribal Territories not completely turn against the nation of Pakistan as a whole - with those of the US, who is interested in seeing the Tribal Territories cease to act as a safe haven for those creating problems in Afghanistan;

3) Failing to see that Pakistan has paid a serious blood toll for helping the Americans (or if she understands that, even worse: belittling those losses);

4) Continuing a series of "unusually frank remarks" which is nothing more than her stating her political beliefs about a number of controversies in public.

Hillary Clinton isn't on the campaign trail, she isn't a Senator from New York. She is the Secretary of State.

When she makes statements in public, they will not be taken as her own private opinion, but rather a statement by the Secretary of State of the United States of America. She's arrogant, irresponsible and it is increasingly clear that she is neither qualified nor has the right personality to be Secretary of State. She has the job because the Obama Administration wanted to make her supporters happy and willing to support him. She couldn't be President: Secretary of State was the consolation prize for this supremely ambitious woman.

In days of old the Secretary of State, when visiting abroad, would hold "frank and open" discussions with his counterparts behind closed doors, not talk about the host country negatively with newspaper editors from that country.

In days of old the Secretary of State, when formulating policy, would carefully weigh their words and use the very precise and carefully chosen words of professional diplomacy, not tell the world what their opinions on matters are apparently off-the-cuff.

In days of old the Secretary of State would be comprehensively briefed on the internal politics of countries they visit in order to better understand what motivates their discussion partners in order to make negotiations work more smoothly and achieve results, not antagonize their hosts with private opinions that both show ignorance and belittling of local achievements. People in the Third World are often very proud of things that appear to us, as Westerners, to be fairly trivial and not too interesting. Belittling the apparently second-rate highway system, a couple of dams with electricity generation, or a couple of waste water treatment plants in a developing country is an insult: we take them for granted, but the vast majority of the world sees them as something to be very proud of, and pride is a dangerous thing to insult.

In days of old the Secretary of State would be a political appointee with significant international experience, chosen to represent the country, not the primary runner-up with no international experience worth speaking of and chosen in order to placate her supporters.

Of course, in days of old you'd might also expect some professionalism on the part of such people.

Oh, how I yearn for the days of old.

Donnerstag, Oktober 29, 2009

This GDP sucks...

I usually don't comment on current economic events.

But the numbers today suck.

They show 3.5% annualized GDP growth, which is undeniably in and of itself good.

But the components are not good: while the cash for clunkers shows up with a +22% for consumer durable goods, nondurables are only up 2%; nonresidential investments remain firmly negative, with only residential showing as 23% increase due to the various stimulus plans. In other words, we see the stimulus growth, but it is failing to bring anything else up to speed.

Remove those two and you're firmly back into negative territory.

This means the recession really isn't over: it only looks that way. Exports were up 15%, but imports were up 16%, due to the weak dollar and strong oil prices.

The real key to understanding what is going on is that incomes remain down and tax revenue is up; wages and salaries are down, personal outlays are up, which means that the savings rate went from 5% to just over 3%. This is exactly the opposite direction these numbers should be moving in: this recession isn't over yet.

This recession isn't over. If you look at the numbers from last year, GDP is down 2.3% and investments are down 25%; looking at an index with 2005=100, investments are now at 70% of that level.

This recession won't really be over until investments are back and incomes start climbing. The US economy may have stopped digging itself into a deeper hole, but it still hasn't even taken a look at how to get out of the one it dug.

This is a stimulus-driven recovery quarter that has no stamina.

Ye gods.

Three Quotes And A Link, or Where It Is All Heading...

Which is what these folks want to begin with. Parasites all.

Let's begin with three quotes and a link...

The death-knell of the republic had rung as soon as the active power became lodged in the hands of those who sought, not to do justice to all citizens, rich and poor alike, but to stand for one special class and for its interests as opposed to the interests of others.

Theodore Roosevelt, Labor Day speech at Syracuse, NY, Sept 7, 1903 ("Theodore Rex" - Edmund Morris)
26th president of US (1858 - 1919)

The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money

Alexis de Toucqueville

When the people find that they can vote themselves money, that will herald the end of the republic. Sell not liberty to purchase power.

Benjamin Franklin
US author, diplomat, inventor, physicist, politician, & printer (1706 - 1790)

And here's that link.

The relevant passages:

...the aim of the Copenhagen draft treaty is to set up a transnational "government" on a scale the world has never before seen.

The "scheme for the new institutional arrangement under the Convention" that starts on page 18 contains the provision for a "government." The aim is to give a new as yet unnamed U.N. body the power to directly intervene in the financial, economic, tax and environmental affairs of all the nations that sign the Copenhagen treaty.

Here's a link to the document thus referenced.

And that which is quoted in the WSJ isn't the really bad aspects of this draft treaty, this is:

The new agreed post-2012 institutional arrangement and legal framework to be established for the implementation, monitoring, reporting and verification of the global cooperative action for mitigation, adaptation, technology and financing, should be set under the Convention. It should include a financial mechanism and a facilitative mechanism drawn up to facilitate the design, adoption and carrying out of public policies, as the prevailing instrument, to which the market rules and related dynamics should be subordinate, in order to assure the full, effective and sustained implementation of the Convention.

That's in Annex I, paragraph 36. That's page 18 in the linked-to PDF file.

Market rules are subordinate to whatever these people think and plan: that in and of itself is a recipe for disaster, one that will take decades to develop.

Are these people really that stupid? Collectivism doesn't work, regardless of how much you want it to: it's like a Christian Scientist praying when he has a burst appendix. That should have been the lesson of the 20th Century: guess that history will be repeated, most definitely this time as farce. It would be funny except for the catastrophe coming.

Reading the actual document is painful: it is full of alternative languages that make reading it like reading a thesaurus, and which means that we won't know the actual language until it's probably too late. Actually, it is too late: this should have never reached this stage. This is the takeover of the world by the Watermelon People.

Further from the WSJ:

The reason for the power grab is clear enough: Clause after complicated clause of the draft treaty requires developed countries to pay an "adaptation debt" to developing countries to supposedly support climate change mitigation. Clause 33 on page 39 says that "by 2020 the scale of financial flows to support adaptation in developing countries must be [at least $67 billion] or [in the range of $70 billion to $140 billion per year]."

And how will developed countries be slugged to provide for this financial flow to the developing world? The draft text sets out various alternatives, including option seven on page 135, which provides for "a [global] levy of 2 per cent on international financial market [monetary] transactions to Annex I Parties." Annex 1 countries are industrialized countries, which include among others the U.S., Australia, Britain and Canada.

To be sure, countries that sign international treaties always cede powers to a U.N. body responsible for implementing treaty obligations. But the difference is that this treaty appears to have been subject to unusual attempts to conceal its convoluted contents. And apart from the difficulty of trying to decipher the U.N. verbiage, there are plenty of draft clauses described as "alternatives" and "options" that should raise the ire of free and democratic countries concerned about preserving their sovereignty.


Now you understand why I put those three quotes up at the top. Let's rephrase them:

The death-knell of the UN had rung as soon as the active power became lodged in the hands of those who sought, not to do justice to all countries, rich and poor alike, but to stand for one special class and for its interests as opposed to the interests of others.

The effectiveness of the UN will endure until the day it discovers that it can bribe the world with the developed nation's money

When the technocrats find that they can vote themselves money, that will herald the end of the UN. Sell not liberty to purchase power.

The effectiveness of the UN will end when those who pay the bills realize that they are paying not the bills for the UN, but rather have paid for their own enslavement. Technocrats - this is obviously their grab for power - don't understand that the UN is not inviolate and is doing its level best to make itself into that previous failure, the League of Nations.

So where is it all heading?

Towards a world reverting to power politics (which, given the nearness to Chicago Politics, makes this very popular with the Obama Administration), reverting to a pre-WW1 situation of Great Powers jockeying for position. We know that this was the major reason for the secret treaties that made WW1, the most ruinous blood-letting of Europe's long and bloody history, inevitable. The world will revert to this because this is what will doom the UN: there will be a reaction to this treaty, if signed, that will result in it being rejected, ignored and broken at best. Worst case: the UN finds a way to enforce this treaty.

Fear not so much for yourself: fear for your children. If the AGW is allowed to try to scare you with the premise that your children will suffer based on their models, then I can scare you by pointing out that collectivism of any kind simply doesn't work. It is based on the fallacy that the expertise of a few - the collective's leaders - is vastly better for everyone than what we now know is the wisdom of the crowd. A thoroughly disproved and discredited theory: one that has killed more people than any other ideology in humankind's history (add up the deaths from Soviet and Maoist collectivism, they number in the hundreds of millions).


Mittwoch, Oktober 28, 2009

The Left, Vietnam, Afghanistan and Allies...

This drew my ire.

One of the defining aspects of the modern American left is their commitment to a cost-free foreign policy. They basically want the world to listen to what we say - much like they'd like the US population to do the same thing - but they don't want to spend money and make commitments that entail American soldiers dying overseas.

It's really that simple. They want a foreign policy without costs, without lives lost. They don't want the lives lost because any life lost is a "waste" (regardless of why) and they don't want the costs because they've got "better" things to do with the money. Scratch any modern leftist and you'll find someone who would rather spend money on poverty (one of the greatest absurdities of all time: the War on Poverty was won, but by poverty) and union jobs rather than on the men, women and weapons needed to defend the country. Their overarching, supremely naive and internationally ignorant belief is that if we can just sit down and talk to people, they'll understand that war is a bad thing and won't do it.

Sure, I'm oversimplifying, but the core of the matter remains.

Now, in Vietnam the South Vietnamese and the US won the military war (yep, that's the case: go read your history books instead of the drivel that passes for education that most receive) and beat off an invasion from the North that used more tanks than the Germans had at the beginning of WW2.

The war was lost when Congress cut funds to South Vietnam to the extent that North Vietnam knew it couldn't lose when it rearmed and sent another massive military force to invade the South again. This time the South Vietnamese, despite the sacrifices of the ARVN 18th Division (outnumbered 7:1, it destroyed three NVA divisions before being overrun), collapsed: bereft of logistics and abandoned by Washington, the South Vietnamese military collapsed and the country was rapidly occupied by the North Vietnamese.

The key point here is that South Vietnam, for all its problems and corruption, was a functioning country, largely pacified (the Viet Cong had been destroyed by the Tet Offensive and rural pacification over the following years) and most certainly viable, but threatened by massive forces from the North (armed by the Chinese and Soviets with logistics and weapons) that made the country extremely vulnerable, economically, militarily and politically.

North Vietnam won because they were able to help US domestic opposition to the war spread the propaganda from the North. Outrages such as the "Column of Tears" where over 120 000 civilians were killed by the North Vietnamese forces in pursuit of South Vietnamese forces retreating (the civilians were fleeing the fighting and the North Vietnamese made no efforts to avoid killing civilians in the pursuit of the ARVN forces, which were mixed in with the refugees) were dismissed as propaganda, while the peace movement swallowed the fiction that it was the Viet Cong who were taking over the country (it wasn't: it was a massive invasion of the South by the North in blatant disregard for the Geneva Accords between the two countries).

Are we now seeing the same in Afghanistan?

First of all, Richard Cohen dismisses General McChrystal as a "celebrity soldier", making fun of his popularity with the troops and his commitment to fitness.

Second: reducing the request for troops to "that's what Generals do", Westmoreland did it before "reality" (read: domestic opposition to the war) stopped him.

According to Cohen:

Those whose own battle cry is "Give the generals what they need" are actually saying "Give the generals what they want" — which is not responsible policymaking.

No, Mr. Cohen: giving those to whom you have given tasks that require resources less than those resources is not responsible policymaking. History has taught that trying to do too much with too little is a repeatable recipe for higher losses and getting beaten on the battlefield. It is the height of irresponsibility to tell the troops (and Mr. Cohen, the troops aren't dumb) that because the government wants to reform health care, more soldiers are going to die because the US has decided it doesn't want to win the war and is dithering about what to do about it.

Short-changing the troops in the field is a recipe for disaster that can be seen by anyone with a modicum of understanding of logistics and the military: it costs real money to fight a war. It also costs lives that Americans always regret (our opponents aren't so squeamish: they understand what they are doing).

But it costs even more to abandon allies.

To repeat: the Democrats want a cost-free foreign policy that requires no commitments of money and blood. Obama isn't making a careful and weighed judgment about the war in Afghanistan. He's trying to find a way to avoid making decisions that he will have to back up. He's procrastinating. He wants to send in drones and fight a nice, sanitary war where no one on our side ever gets hurt.

Abandoning Afghanistan has, for the Left, enormous attractiveness: corrupt government, mostly ignorant and extremely religious peasants, not much of value there (besides drugs), and we get to look good in the eyes of Leftists everywhere to show that the US won't live up to its commitments (since these commitments were the cornerstone of anti-Soviet policy and remains the outrage of the Left (that the US is an imperialist power, just like the Marx, the Soviets and Mao told)). They get to then scale back the military - we don't wanna fight wars no more - and spend the money on all those important domestic agendas that they hope will ensure that they remain in power. For the Left, abandoning Afghanistan, just like abandoning Vietnam, is a win-win-win situation in every imaginable way.

Why then, would anyone conceivably want to ally themselves with the United States?

The world is not a perfect place, filled with puppies and unicorns, and we'd all live happily ever after when the government takes care of you from cradle to grave. Where we'd all get along together if we could just talk things out.

The world is filled with attack dogs that grew from those puppies, and there aren't unicorns out there, but bears and big cats, and as long as there is evil in the world, men (and women) will kill for fame and profit, in order to control their fellow men and enslave them, in order to enjoy the fruits of other people's labor and to hear the lamentations of their women and the cries of their children.

Mr. Cohen and his like are the core of the problem. They are not the solution.

Dienstag, Oktober 27, 2009

Consider This...

One very, very good reason to be opposed to sweeping health care reforms, energy taxes (regardless of what they're euphemistically called) and other sundry ways the government is aiming at making sure you pay your own fair share of government largess is the fact that it comes at a very real cost.

Savings, after all, is what is left over after wages and other income, subtracting taxes, usage fees and consumption (in the widest sense: paying a mortgage, after all, means that your savings rate drops as you service the mortgage). Given the simple fact that wages have stagnated over the last several years, this means that additional costs (especially energy) will be met by a mixture of changed consumption patterns and a reduction in the amount of money you actually save.

Now, looking at the middle class, why do people save?

For two basic reasons: one, to accumulate money in order to avoid financing an acquisition; two, to have reserves when you need them.

The biggest reason to build up savings - besides avoiding financing costs - is to ensure that when you no longer work, you can continue your life style without too much shock to your finances (and life style!). When do you (usually) no longer work?


The financial advice that at least my generation has received was to diversify investments and to acquire real estate holdings to protect yourself against inflation. Good advice, basically.

The problem? Even diversified investments have taken a huge hit. Real estate holdings are indeed a great hedge against inflation, but given the fall in real estate prices (and little likelihood of them recovering in any meaningful way) and the moribund market, returns on investment there are disappointing at best and downright depressing in general.

Hence: at a time when so much capital has been wiped off the accounts (of course, a great deal is only paper losses, since folks haven't actually sold), it's a good idea to increase costs even further?

Talk about counterproductive: health care reform and energy taxes will cost you real money, regardless of what the proponents claim. They're largely being extremely dishonest when they claim that offsets will take care of this (talk to anyone who has been hit with heavy financing costs when you pay for an operation and the insurance company reimburses several months later...), as these offsets are largely imaginary and based on heroic assumptions (for instance, that your employer will give you, net, what they paid in insurance costs) that cannot be legislated without showing their hand in wanting to micromanage the economy.

Consider this, then: both health care reform and planned energy taxes will leave you with less money at the end of the month. You'll have a warm and fuzzy feeling that no one is left behind, that everyone has health care coverage (whether they want it or not) and that you're doing your part to save the planet.

But that's all you'll have. You won't have money to help pay for your retirement. You won't have money to consume the way you want to (especially because of energy costs increasing dramatically) and you will be increasingly dependent on what Social Security can pay you.

Given the demographics behind Social Security and given the costs coming down the road thanks to the Obama Administration and the Democratic Congress, enjoy your standard of living now.

Because it's not going to stay there.

Not for young folks who are hoping for at least as good as their parents; not for working-class stiffs; not for white-collar workers; not for even the moderately well-off. The real rich (defined as folks who don't need to work because their non-wage income, invested in US government benchmark bonds, is large enough for a rather nice standard of living) won't be affected, but then again, it's pretty much the definition of being rich, isn't it?

Further Data Points For The Trend XIII...

Just two points today.

First of all, a bit of a follow up on this.

This in the Times underscores how increasingly loony the environmentalists - sorry, the AGW folks - are becoming, and how apocalyptic they want our future to be.

To quote Lord Stern of Brentford:

...a successful deal at the Climate Change Conference in Copenhagen in December would lead to soaring costs for meat and other foods that generate large quantities of greenhouse gases.

He predicted that people's attitudes would evolve until meat eating became unacceptable. "I think it's important that people think about what they are doing and that includes what they are eating," he said. "I am 61 now and attitudes towards drinking and driving have changed radically since I was a student. People change their notion of what is responsible. They will increasingly ask about the carbon content of their food."

The obsession with carbon content is designed to rule our lives. Convenient, that, since socialism/communism failed and fascism is so totally discredited. It remains nonetheless a new collectivism, one based on the principle that you, the common man, is too dumb to know what is good for you and hence you need - and it must be imposed - a new order to make sure that your life is not wasteful.

Ye gods.

Second, the continuing belief that changing the name of the thing makes it somehow ... different.

How stupid does Pelosi and Co. think we are?

Sorry: that question answers itself. Calling a thing by a different name makes no difference to the reality of the thing. Basic metaphysics, that.

Over and Out.

Freitag, Oktober 23, 2009

Further Data Points For The Trend XII...

Today's take is from the WSJ.

I've recently re-read the 1957 novel "Atlas Shrugged" by Ayn Rand. While it's not really all that well written - in fact, there are huge stretches of turgid prose and if anything the novel could stand as the archetype of the "preachy" novel - the basic story line remains intriguing, with the slow descent of a fictional United States into chaos by stupidity.

This reminded me of one of the tenets of the novel: that you can't make someone do something against his own interests for any length of time without using legal force and/or a rather disturbing emotional blackmail. Fundamentally, the Obama plans for health care require not only the removal of the profit motive, but also the selflessness of doctors: after all, the plan calls for a major increase in the number of "primary care doctors". The problem is that there aren't enough of these right now and there won't be enough of them for the near-term future: those graduating are also not necessarily going to go for this category of work, which is amongst the lowest-paid of all doctor specialties. According to the link, cardiologists earn an average of $419k, oncologists $315k and "ordinary" primary care doctors $173k. For President Obama's plans to come to fruition, the government must count on the vast majority of medical students electing to become primary care doctors, rather than specializing into increasingly difficult and hence more lucrative fields of medicine.

Now, medical students become specialists not only for the higher pay, but also because they don't want to do with the bureaucracy that primary care doctors put up with. The government wants to increase the number of students studying medicine, but does so by lowering standards: further, the expansion of the number of students would cost, according to the link, something like $25bn over 10 years and is not part of the health care plans.

The only way this works is that primary care doctors no longer remain primary care: in order to make ends meet, more nurses and physicians' assistants will be providing primary care. In the UK, the ratio of these folks to doctors is over 5:1; in the US, it is less than 4:1, and it will have to be adjusted upwards.

The fundamental point here is that any government plan that requires the selflessness of others to function is doomed to failure, which in the health care sector is too expensive to risk.

In keeping with the Ayn Rand theme, this underscores another stupidity.

Here the government will control wages in those industries it has bailed out, especially those wages of many of the most skilled and complex jobs around, i.e. upper management. While it is popular and fun to bash corporate executives - and sure, some of them do indeed deserve the bashing, it is another thing entirely to expect that if you cut someone's salary, they will not notice. They may not be jumping ship right now, but what happens during an upturn? The government apparently expects people to continue in their jobs regardless of their pay situation.

Here's a key quote:

The Treasury and Federal Reserve announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks.

Bingo: the government created this problem and is now blaming the bankers for doing their jobs.

What the government is actually doing is setting up the collapse of these bailed-out companies: when an upswing comes, they will move on to jobs without the punishing limits and these companies will lose their most productive people when the upswing picks up.

That's always a great recipe for disaster,


Paul Volcker ... the former Fed Chairman argued in Obama circles that a better way to regulate banks is to separate the riskiest trading activities from those that accept taxpayer guaranteed deposits. That reform would have moved the riskiest proprietary trading out of taxpayer-protected institutions. But the White House and Treasury deemed this too politically difficult, so instead they are now regulating the pay of bankers as an alternative way to diminish those risks. Good luck.

Meanwhile, the Administration still hasn't done anything to change the incentives for excessive risk-taking that are embedded in its own "too big to fail" doctrine. As long as bankers and their creditors believe they have a federal safety net, they will have a cheaper cost of capital that will encourage them to take greater risks. New pay rules will quickly be worked around or through.

As Mr. King put it this week, "The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." The same can be said for pay curbs.

The most profound mistake in these rules is the terrible precedent they set for wage controls across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.

To see what the effects of such moves are, and to see what happens when labor takes over, read this.

42000 employed when at best 8000 were needed. That way lies madness.

Finally, this.

While not a news item as such, it underscores how close we appear to be to the fictional United States in Atlas Shrugged.

A compliant, non-critical media taking direction from the powers-that-be is a major disservice to both the 1st Amendment and the cause of democracy in the republic.

So, let's review some further data points:

Government plans that require the impoverishment of participants in order to gain political goals: check.

Government interference in market incentives that then cause a drop in services: check.

Government control of key areas of the economy with the goal of removing the profit motive for economic activity: check.

If you can stand the sometimes embarassing prose and the other faults of the novel, do read Atlas Shrugged.

And see the writing on the wall.

The Future Is So Bright...

There's a study in today's FAZ that lists what life would be like in a Germany that reduces its Co2 usage by 95%. It's behind their pay firewall (and in German), but let's just go to the core of the matter.

The future is so bright...

All houses will have to be heavily insulated and the only lights permitted will be LEDs. Existing houses have to be renovated to the newest energy efficiency levels, and house design and architecture will be subsumed by legal requirements for energy efficiency that limit the size of windows and requires solar heating of hot water and storage thereof. There will also be limits to the size of the houses according to the number of people living there: however, since office jobs and white-collar work can also be done at home, home offices will increase the allowable size.

Short trips are allowed for electrical vehicles only, longer trips are strictly by public transportation. Only delivery vehicles may use biologically produced diesel-like fuels. There are no gasoline or diesel power cars, there are no hybrids: only electrical vehicles powered strictly by renewable energy sources (which most explicitly does not include nuclear power).

These renewable energy sources account for no less than 50% of all energy sources, meaning, of course, that the countryside is filled with large windmills and every business covers rooftops and car parks - woops, won't need those, will we? - with solar panels for electricity production. Since these renewable energy sources are not very dependable, there will have to be large-scale reserve mechanisms, such as damming small river valleys to store water for producing energy during down times for windmills and solar, as well as various other alternative energy storage schemes. For any other power producing scheme that emits Co2, carbon capture and storage schemes must be in place.

So, what else?

People may not consume more than one-third of their current diet of meat, especially beef, as these produce too much Co2. The number of animals permitted overall will be strictly controlled (i.e. don't plan on having a pet unless, of course, you're willing to give up other activities as a result).

Life will be centered around Co2 avoidance, with a system of allowed activities that generate Co2. You'll need to ensure that you have the right kind of emissions certificates and the legal standards and marginal rates of Co2-generating activity will be strictly controlled.

Lovely place. The study was done for the WWF by Prognos in Basel, Switzerland, and according to the WWF, it means that people will have to adjust their life styles.

But they won't have to "give up" anything.

Oh really. Nothing? Like personal mobility, building the house of their dreams, having a couple of pets, of having a countryside not filled with windmills, things like that?

But, hey, you're saving the planet.

The future is so bright...but lit only by LEDs...

Donnerstag, Oktober 22, 2009

This Day In History...

On this day of Our Lord, 22 October, the following happened:

I was born on the day that the British tested a nuclear device in
Maralinga, Australia;

I was one year old when US forces suffered their first casualty in Vietnam;

I was six years old when President Kennedy announced the air and naval
blockade of Cuba;

I was seven years old (and living in Chicago!) when 225,000 students
boycott Chicago schools in Freedom Day protest;

I was eight years old when Apollo 7 returned to Earth;

I was also eight years old when Sartre received and declined the Nobel
Prize for Literature;

I was 10 years old when the Soviets launched Luna 12;

I was 10 years old when The Supremes became the first all-girl group
to have a number 1 hit on the Billboard Charts;

I was 15 years old when the UN Security Council declared a cease-fire
in the Yom-Kippur War (Resolution 338);

I was 17 years old when Venera-9 soft-landed on Venus;

I was 22 years old when the first Trans-America drive was completed
(from south to north);

I was 22 years old when Pope John Paul II was installed;

I was 23 years old when the US allowed the Shah of Iran to travel to
New York for medical treatment;

I was 24 years old when the South Korean Constitution was ratified;

I was 25 years old when PATCO was decertified for its strike;

I was 25 years old when US Federal Debt exceeded $1 tr for the first time;

oddly enough, "history" ends here: apparently this day has been quiet
ever since (besides some sports events).

If today was a Sunday, it'd be Mother-In-Law Day in the US (yikes!);

I share my birthday (but not birthyear!) with Cherie Witter, Miss
February, 1985;

so do Derek Jacobi, Dr. Timothy Leary, Franz Liszt, Sarah Bernhardt,
John Reed, Karl Jansky (found cosmic radio noise), Joan Fontaine,
Robert Rauschenberg, Bobby Seale,Christopher Lloyd, Annette Funicello,
Catherine Deneuve, Deepak Chopra, Lee Meredith, Patti Davis, Jeff
Goldblum and all the others.

Where has the time gone...

Mittwoch, Oktober 21, 2009

Markets, Markets, Markets...

This time a troika from the FT.

First of all, Martin Wolf.

He makes, along with Mervyn King (more later), the best argument why moral hazard is a serious problem, since it permits risky behavior with no downside. This has, once again (and I do apologize to those who are tired of reading about markets), everything to do with markets and the results of market resolution of supply and demand.

If someone selling on an open market makes a mistake and doesn't price their product appropriately, they bear the damage: price it too low and you lose income; price it too high and you will have unsold inventory (i.e. your returns will not be where they need to be). Remember - and I fear that this is something that all too few really understand - that business is inherently risky, starting from misunderstanding what market demands are to making the wrong personnel and manufacturing (taken in the broadest sense of the word: service industries "manufacture" in this sense when they produce their admittedly incorporeal products) process decisions, to using the wrong marketing approach or even the wrong word ("Nova" in a Spanish-language market for a car is one of the more spectacular examples, as it means "doesn't move") or the wrong color.

But consider this:

This recovery has been no accident. When central bank money is almost free, prices of risky assets are recovering and competitors have disappeared or are weakened, making money is a relatively simple matter for the strong survivors.

Indeed: this is the market result. If money is free, then there is no risk to do anything. This is, however, the cornerstone of the moral hazard: risks don't simply disappear. By making money free - and removing the risks that were hence plaguing the system - you set up the problem that Mr. Wolf addresses:

We must not get diverted by the financial sector's opposition or by populist rage. We must focus, instead, on the core issue. Trying to make financial systems safer has made them more perilous. Today, as a result, neither market discipline nor regulation is effective. There is a danger, therefore, that this rescue will lead to still greater risk-taking and an even worse crisis at some point in the not too distant future.

Either we impose a credible threat of bankruptcy, or institutions we have to support are made safer, or, better, we have both of these. Open-ended insurance of weakly regulated institutions that take complex gambles is intolerable. We dare not return to business as usual. It is as simple – and brutal – as that.

Bingo: the inherent risks of the market must be allowed to operate with no bail-out mentality: further, and this is more critical, failure has to have meaning, most emphatic meaning, to banking careers. The idea of the bonus system truly means a system that rewards the good: it has become a system that pays simply because those people work in the banking system at all. That is a perverse development if there has ever been one.

Now, let's move to Mervyn King.

He's right: "too big to fail" doesn't mean "too big to fail" but really means "too big to be tolerated".

The key quote, nicely Churchillian:

Never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.

Nicely put.

The Bank governor wants to see the utility aspects of banking – payment systems and deposit taking – hived off from more speculative ventures such as proprietary trading. "There are those who claim that such proposals are impractical. It is hard to see why," he said.

Finally someone who understands that it is the mixture of the two which is deadly: that the same bank that handles the day-to-day business of finance is the same one who can torpedo the entire system by allowing extremely high leveraging into extremely risky instruments.

Next, Daniel Yergin.

Yergin wonders what will happen to capitalism in the wake of the Great Recession: he says that there is less talk about the "magic of markets".

The magic of markets? The only thing magic about markets is how ruthless they are, how little markets care. The only thing that went wrong with markets is the expectations people had about them, that they "understood" how markets work: that is the cause of the bitterness, suspicion and outright hostility to them as Yergin puts it. Government control over the businesses that ruined themselves in the markets is indeed ad-hoc: there was no sinister master plan to take over the automotive, energy and finance industries in the US, but the government intervened to avoid even worse errors, errors made in panic. The government will make its own errors - and given the qualities of the current Administration, they will prove to be errors made in order to enrich the politically connected in true Chicago fashion - but they won't be the errors of those panicking in order to cover up how they made their errors.

Yergin's major points of the emerging narrative are illuminating: too much leverage, risk undetected, failed regulation, political policies, too much greed, psychology, hubris, undetected vulnerabilities, destruction of purchasing power, "can't happen",

Bravo: these are good. Very good, as the underlying core appears. Banks were leveraged too much because the markets were distorted and their own operating conditions deliberately made lewd; risks were undetected because the markets were poorly understood for new products; regulators failed for the same reasons; political policies distorted markets absurdly; given these distortions, too much money could be made too easily; people wanted things so; they thought they had gamed the markets permanently; because market mechanisms were ignored, market vulnerabilities were ignored as well; purchasing power of those losing everything has been destroyed; and most fundamentally, tied in with market psychology and hubris, the idea that it can't happen" led to the Great Recession.

Yergin points out that one result may well be the reversal of willingness to carry risk, which will, of course, slow the economies of the world down. If you are afraid of risk, the road most taken is the safest, but brings the least rewards.

What Yergin comes close to - but alas does not hit - is that if you are going to take risks in this new, scared economy, you need to understand your markets better than ever: not merely demand and supply, but more fundamentally what drives demand and how supply is structured, as well as a detailed understanding of market mechanisms. This won't guarantee success: it will, however, help in avoiding the very risk that no one wants to take anymore.

Finally, someone whose political and professional instincts blind him to the market failure that is destroying his profession: Leonard Downie.

The key quote:

American society must now take responsibility for supporting news reporting, especially local news – as it has, at much greater cost, for services such as education and healthcare.

Must? There is a moral imperative at work here?

All this because the newspapers have had their reason for being yanked out from under them: their business plans no longer function.

Because they ignored the reality of the markets. Hence Mr. Downie's solution: get rid of the market and let journalists produce without regard to economics.


This is, unfortunately, exactly the understanding that leads to collapse, that what someone does is so important that society must support it, regardless of why it cannot support itself.

Societies support education because the economy needs skilled workers to maintain a high standard of living (of course, you can't tell that from any schooling teachers have); they support health care because of moral imperatives to help the helpless and save the sick; journalism as it exists today, that pale shadow of actual reporting of the Murrow age that charades as objective whilst reporting as if there were no objective facts, deserves no death-bed reprive because it has failed in the market.

To do otherwise would be a huge moral hazard: of giving money to those who have failed and continue to fail in the market for their products and to thereby remove the risk, socialize the risk, virtually deny that there even should be a risk.

The fundamental reason why newspapers are failing is that they are not meeting market demand. People stop reading the bread and butter of newspaper journalism, the local daily paper, when it stops reporting on local interests and simply repeats what others say. People stop reading the newspaper when it is a waste of time for them to do so. People stop reading the newspaper when it replaces plain and simple reporting for preachy subjective worldviews masquerading as facts, in effect lying to their public in the name of a greater good. People stop reading the newspaper when it no longer meets their needs.

There are successful local newspapers, thriving ones. The Taos New Mexican for instance, is one. Award winning, it earns money.

Just not a lot.

Here are a few hard, cold facts: newspaper journalists are generally overpaid. It's a job that doesn't require much in the way of skills beyond grade-school grammar and the ability to take notes. Really good journalism, the kind that takes down corrupt politicians and exposes waste and fraud, the kind that Mr, Downie thinks he loves (really, he loves the idea, rather than the reality, as can be seen by the virtually complete compliance of the newspaper journalism profession to missives from the current Administration in Washington; there is enough wrong there to win at least a dozen Pulitzers, but their own political belief have led them to self-censor and not report the barking dog) is, on the other hand, not so easy. But it's also rare: however, journalists are being paid as if they were those folks, rather than the barely skilled labor that most really are.

News reporting, especially the sort that holds accountable those with power and influence throughout the nation, has been a vital part of American democratic life. It may not be essential to save any particular news medium, including printed newspapers. What is paramount is preserving independent, credible news reporting.

What Mr. Downie doesn't seem to realize is that this has already happened. But no one calls them journalists. They're bloggers instead. It's been bloggers that have held those in power and with influence accountable and who have pointed out that the emperor has no clothes.

Not journalists.

Dienstag, Oktober 20, 2009

Further Data Points For The Trend XI...

So, three things from the WSJ from today.

First this.

The proper answer to this is no, the Obama Administration has virtually no interest in human rights, as human rights don't help them in their search for power. If anything, you can clearly see the Obama Administration sacrificing human rights stances, even long-year ones, in the vainglorious search for temporally limited advantages. If the Obama Administration had been around in the late 1980s, the Berlin Wall would still be standing.

Second, this.

Duh: Michigan now has more government employees than it does people working in manufacturing.

Of course it does: that is how Democrats there get elected, by promising more and more to organized labor and ensuring that any jobs are then created in what are effectively closed union shops. Great way to get elected, really, really bad way to run a state economy. At this point, neglecting the state economy would be more benign than what Governor Granholm has been doing to the state economy.

Which is running it, at full speed, into the ground.

Third, this.

Those insisting on reducing emissions, ramping Co2 emissions back to levels below that of when George Washington was in office, are ignoring basic economics, and are henced doomed to failure.

Not an opinion: without understanding that you can't reduce emissions like that without reducing life styles to ones similar to the original colonists, you will run the current economy into the ground in due course. Unless, of course, you double - preferably triple - the number of nuclear plants providing electricity. Yep, that'll go over well with the environmentalists.

Cap-and-trade is a fool's delusion: foolish because it generates costs for political reasons; foolish because it is inherently open to fraud and abuse (and appears to be designed that way deliberately so that folks like Al Gore can make more millions); foolish because it penalizes those least able to pay for it (lower incomes will pay proportionately more, i.e. it's regressive) and, of course, delusional in that anyone can think it is anything more than a way of whitewashing the fact that even under a stringent regime of cap-and-trade, Co2 emissions will increase, rather than decrease; it is also delusional to believe that people will accept a major reduction in life style now to benefit future generations because politicians want it to be that way.

Ye gods, that's a lot. Suffice to say that the Obama Administration is rapidly shaping up to be the worst for human rights world-wide since at least the Carter Administration; that political stupidity is a major reason that we face the problems we do and, finally, when environmentalists ignore basic economics, their pet schemes and demands to protect the environment are doomed to failure.

America’s Healthy Future Act of 2009...and 1502 Pages

That is the official title of the Senate Bill that to date is numberless.

It starts off with a falsehood:

Mr. BAUCUS, from the Committee on Finance, reported the following original bill; which was read twice and placed on the calendar.

This is the first falsehood: no one has read the bill. Yes, I know that this is a formalistic language that pervades such works, but it does not mean that anyone has actually read the bill.

The AHFA (the acronym I'm going to use here) starts off thus:

To provide affordable, quality health care for all Americans and reduce the growth in health care spending, and for other purposes.

Fair enough: the problem is, of course, in how they want to do this. And there is always a problem with "other purposes"...

My first question (and it must be the first question of anyone seriously looking at the problem): is there tort reform?

Surprisingly, there is mention of malpractice. Under Subtitle H, Sec 3701, the Senate Bill recognizes that this is:

an opportunity to address issues related to medical malpractice and medical liability insurance

Not so much tort reform as a directive for the States to deal with this:

States should be encouraged to develop and test alternatives to the existing civil litigation system as a way of improving patient safety, reducing medical errors, encouraging the efficient resolution of disputes, increasing the availability of prompt and fair resolution of disputes, and improving access to liability insurance, while preserving an individual's right to seek redress in court; and Congress should consider establishing a State demonstration program to evaluate alternatives to the existing civil litigation system with respect to the resolution of medical malpractice claims.

Pay attention to the verbs: should...reduce...encourage...increasing...improving...preserving...should...evaluate

Yep, that's all of them.

No where is this binding: the emphasis is nowhere on costs, but rather on safety, errors, resolution, access and preservation of the right to sue. The terms that would otherwise be used are shall...will...must...require. Unless those words are used, it's optional. A nice thing, but not a requirement.

In other words, the States should figure this problem out, but let's not change the right to seek redress in court. If anything, it remains the responsibility of doctors and health care providers not to make mistakes: hence there are no incentives to reduce overtesting (patient safety and reduction of medical errors), but rather an additional layer of bureaucracy (dispute resolution councils) while at the same time not addressing the problem of punishing liability insurance premiums brought about by high malpractice claims awarded by juries and the work of trial lawyers (and of course no mention of tort reform to remove the profit motive from lawyers: after all, the aim of these bills is to remove the profit motive in the insurance industry, isn't it?).

Before going forward on this, the very beginning of the Bill states what the real goal is, there for any and all to read:

The Social Security Act (42 U.S.C. 301 et seq.) is amended by adding at the end the following:



It is the purpose of this title to ensure that all Americans have access to affordable and essential health benefits coverage—

(1) by requiring that all new health benefits plans offered to individuals and employees in the individual and small group markets be qualified health benefits plans that meet the insurance rating reforms and essential health benefits coverage requirements established under parts A and C;

(2) by establishing State exchanges under part B that provide individuals and employees in the individual and small group markets greater access to qualified health benefits plans and to information concerning these health plans;

(3) by making health benefits coverage more affordable by establishing premium credits and cost sharing subsidies under part C for individuals enrolling in a health benefits plan through an exchange;


(4) by establishing the CO-OP program under part D to encourage the establishment of nonprofit health care cooperatives.

Interestingly, this is not a separate set of laws, but will be attached to the Third Rail of American politics, Social Security. Mess with Social Security and you will get fried (for the non-English speakers: the "third rail" in subway systems is the rail carrying the current: climb down to the tracks and touch it: You Will Die).

First, right off the bat: all new health benefit plans are to be "qualified" plans.

In other words, the government will decide what health insurance plans you may buy and you can no longer choose what you want: you may only buy government-approved (that is, after all, what "qualified" means).

Bye-bye market: given the intention to ensure that everyone is covered, the government will determine what plans you may buy. They control the supply: with government control of supply, the market ceases to function efficiently. Period.

And don't think this is my silly interpretation:

For purposes of this title, a health benefits plan which is offered in the individual or small group market shall be a qualified health benefits plan with respect to a State if—
(1) the plan has in effect a certification (which may include a seal or other indication of approval) issued or recognized by the State that such plan meets the applicable requirements of—
(A) this part (relating to requirements for insurance market reforms); and
(B) part C (relating to requirements to make health insurance affordable); and
(2) the offeror of the plan—
(A) is licensed by the State (and in good standing with the State) to offer a health benefits plan in the State; and
(B) complies with such other requirements as the Secretary or the State may establish pursuant to this title for qualified health
benefits plans.

Hence: the Senate Bill means that you may only choose health insurance based on what the government decides is good for you.

Nothing more, nothing less.

Next: to remove the profit motive for health care.

If the government establishes a co-op program, you can be sure that this is, at the end of the day, the desired result: further, given the fact that the government decides what health plans you can purchase, you can be sure that the plans will be so structured that it will drive for-profit companies out of business.

Now, there is a cute twist: the word "Co-op" is actually an acronym:

Consumer Operated and Oriented Plan (CO-OP)

This turns the cooperative idea around: rather than emphasizing the idea of cooperative efforts, it changes the meaning of the word and makes it consumer operated and oriented: however, it is anything but either.

It is the purpose of the COOP program to foster the creation of qualified nonprofit health insurance issuers to offer qualified health benefits plans in the individual and small group markets in the States in which the issuers are licensed to offer such plans.

In other words, the profit motive is to be removed from the industry.

That is not what cooperatives do: classic cooperatives, such as housing cooperatives and dairy cooperatives, bundle capital and purchasing power to reduce costs. Dairy cooperatives are profit-oriented industries that simply pool capital and process to reduce the individual costs for dairy farmers, as well as helping dairy farmers present a unified sellers' front that helps them keep prices up in order to make money; profits are distributed amongst the farmers. Housing cooperatives exist to control access to who lives in such a building, as well as to make it impossible for speculators to drive housing costs up. While perhaps not explicitly profit-oriented, there is the goal of maintaining quality of life without falling prey to speculators who want to sell that quality of life to those who aren't in the cooperative. This is an post-materialist profit motive.

But here, the word co-op means non-profit, nothing more, nothing less.

In Section 2251 of the Senate Bill, the government will subsidize those deemed qualified to set up a coop and will ensure that there is at least one coop in each and every state in order ...

In order to what, really?

Simple: remove the profit motive from the industry as a whole. This is the only real reason, this is the real threat to the livelihood of everyone working in the system who does not want to work for a non-profit (with attending low wages for all but the managers of the non-profit).


Because only the profit motive ensures that scarce resources are used to maximum economic efficiency.

Without it, there will be politically motivated waste and fraud: if anything, this guarantees that the market for health care will no longer behave as a market, but rather will be distorted in order that the market behaves in a politically mandated way.

We've already seen what happens when the government subsidizes activity in order to change markets: this is what happened with the sub-primes.

Now the government, in its oh so infinite wisdom, wants to do the same to the Health Care industry.

Have fun with that one. Reading the rest of the bill is merely an exercise for the masochistic: it just tells you how you are going to be screwed.

You only have to read the first few pages to realize: you are going to be screwed.

Welcome to the Brave New World of politically mandated health coverage and availability. Doctors and care providers remain vulnerable to malpractice suits fueled by the profit motive, while they themselves will be denied that exact motive in providing their services.

A perfect trifecta. However, only for government bureaucrats, trial lawyers and managers of co-op programs. Everyone else?

You're screwed.

Montag, Oktober 19, 2009

...An Extended Period Of Time...

Part of the problem with economics today is a concentration on immediate, in the temporal sense, cause and effect relationships, whereas many of the problems facing us today are not the result of short-term causal relationships that help academics write papers and move along in their careers.

Rather, problems we face now tend to be long-term dysfunctions forced upon market economies by politicians who would rather have economies behave as intended, instead of of behaving as they actually do.

What do I mean?

Well, at the risk of sounding like a one-note player, sub-primes: the idea that you can use raise prices on prime mortgages to pay for the risks of sub-prime mortgages - the logic behind the whole mess - is short-sighted, since what has happened is that the markets adjusted to this brave new world and ruined the lovely scenario that the politicians had thought up. But it doesn't stop there.

Nasty, brutish things, those markets. The politicians are increasingly taking the attitude that markets don't work, that the government has to administer in order to create a more perfect result.

Such hubris, such incompetence: what politicians can't stand is that the markets don't work for them. The only thing the government creates when it gets so intimately involved in the operations of the economy is corruption as the politicians in charge rotate from office to complicit thievery (as getting bonuses for driving Fannie Mae into insolvency should be viewed as) back to office, an eternal cycle uninterrupted by political scandal - as the press no longer dares raise its castrated voice - or opposition, since the Republicans are being marginalized as fast as possible (and to a large degree are either unindicted co-conspirators, truly feckless or simply unable to do more than tilt at the windmills as they go by.

Reading this in today's FT, the final paragraph caught my eye.

"I don't think there is a single serious economist out there saying the dollar's dominant reserve status will be replaced by another currency in the near term," says Mr Adams. "Too many things would have to happen. We would have to really screw up policy over an extended period of time."

Well, this is precisely what is happening.


While readily admitting that hindsight is a bitch worth marrying, policies are indeed being promulgated that, once in place for a number of years, will screw things up royally.

We're on the best way to the Post-American Century, and it's not going to be a pretty place. Lower incomes, lower quality of life, lower expectations (both of ourselves and our children and their children), all for the sake of Chicago politics.

Fasten your seat belts, gonna be quite a ride. Let's talk in five years and see where this has taken us. You will be disappointed beyond your wildest expectations.

Unless, of course, the Republicans can re-invent themselves as the party of common sense and get the message out that they deserve to be re-elected in 2010. Not merely re-elected as "not a Democrat", but actively reinventing themselves to get the country back on keel before foundering.

The silence is deafening.

Further Data Points For The Trend X...

This morning two further points. But for once, one of them is positive.

First this.

It is indicative of the contempt that the current administration holds for the media: of course, the media have earned it.

At least it is finally public, albeit not something that is going to be discussed in ... the media. Of course it can't be: that would endanger access, wouldn't it?

At this point in time, I wouldn't give a journalist the time of day. Seldom has a profession fallen so far.

But on a more positive note, this.

Finally, a recognition of where the real problems lie:

You talk about systemic risk. The systemic risk today is the Congress of the United States.

Said not by me, but by the ranking Republican on the Senate Budget Committee, New Hampshire Republican Senator Judd Gregg.


Standards of living will drop if we keep this up.

Bingo. Too few see that the standards of living of over 300mn are being sacrificed because perhaps 35mn don't have health insurance (regardless of the reasons why).

Too bad that he isn't seeking re-election. Of course if he was, he probably wouldn't have put this quite so bluntly.

Sonntag, Oktober 18, 2009

What is Fundamentally Wrong With Health Care Plans...

There is one thing fundamentally wrong with the current House and Senate Health Care Reform plans.

Both ignore market realities.

By market realities I mean how and why the markets function: supply and demand.

Insurance sellers offer coverage for health-related expenditures in return for a cash flow from their customers. The size of this cash flow is dependent on two things, and two things only:

1) Risk
2) Coverage

Tamper with either of these, and you destroy the business model of insurers: if they cannot charge for increased risks, they will have to absorb those costs, which, given the fact that the insurance companies are businesses, means that they will increase base rates to cover those costs.

The same is true for increasing what is covered and who is covered. There are people out there whose lifestyles are so risky that no one wants to provide them with coverage, since there is little or no likelihood that extreme costs cannot be avoided; there are coverages out there as well that provide services that have virtually nothing to do with health-related issues, but rather are for comfort or for having fun. My insurance, for instance, doesn't cover going to the spa for relaxation; if it did, I'd be paying extremely high insurance rates that would, in sum, exceed what I would pay if I paid for the spa trips myself.

Now, there are no ways around these points: these are the cold equations of the insurance industry. Insurance underwriters - those who put the capital up so that insurance companies have adequate reserves for covering very large expenditures when they become necessary - are putting their capital at risk and receive income for this; it's part of the cost of doing business as an insurance company. Old, established companies have usually built up their own capital reserves and while a goodly portion are invested in safe, long-term investment instruments, some of that money has to remain liquid, i.e. can be paid out rapidly when needed.

Obviously, the supply of such money is limited: hence the supply of insurance coverage is also not a free good, but one that carries a cost. You can adjust the cost by adjusting the coverage: if all you want is coverage against what is called catastrophic events - major operations or serious illnesses - and you are willing to pay for your day-to-day coverage out of pocket, then your insurance costs are going to be moderate, since the insurance companies are familiar with the statistical chances of such things happening to you. Of course, if you are a smoker, enjoy high-risk sports (or sports with high risk of injury), have an unhealthy life style (obese or, and no I'm going to anger people, are a male homosexual with frequent partner changes), or have a high-risk occupation, your risks are higher and as a result, your costs will be higher, as you are statistically a high risk.

The demand for insurance is inverse: everyone wants outstanding coverage, paid for by their employer, so that they have no out-of-pocket expenses for health care, allowing you to keep a lot of that hard-earned money. Further, those whose life styles are high risk don't want to carry the burden of those costs, since that is a real cost, as opposed to the theoretical costs of an accident or injury or illness; they want the general public to subsidize their life style risks so that they can actually enjoy them without having to pay the financial price. Further, as one ages, problems increase and are increasingly expensive to deal with; here we all want the coverage that prevents our children from having an inheritance, or, in the worst case, lead to an early death because we didn't pay for the increased coverage when we were young and it was too expensive when we were older.

Now, take a look here and here.

Understand that the first link shows the fundamental misunderstanding of politicians when dealing with the insurance business (oh, and by the by: this is also applicable to anyone offering insurance, even if it claims to be non-profit or "collective" or "public option", since the cold equations of the business do not change!).

The key point in both House and Senate plans is that pre-existing conditions are no longer to be considered when offering insurance: this means, given the above facts, that overall costs must increase if risks are no longer permitted to play a role in what insurance companies charge for coverage.

Unless, of course, you take a look at the second link and realize that what the government really wants to do is to change the definition of what risk is: this is nothing but the politicization of risk analysis for the health industry.

That way lies madness: no insurance company will be able to work on long-term risk financing, since these risks may well change every couple of years as medical fads come and go, and as administrations change. Further, and this is more fundamental, politicizing risks means that you create the mechanism for making politics, so to speak, risky: if you are in the wrong political party, you may end up paying for your political beliefs because of a hidden charge for being in the wrong party.

Am I being paranoid about this? No: all I am saying is that the mechanism for such abuse is being created. That cannot be denied: this is what is fundamentally wrong with the health care plans currently up in the House and the Senate.

So, we are facing, once again, government interference of the basest kind in the industry: instead of dealing with the fundamental problem of the insurance business - that there are those who would like to have insurance but literally cannot afford it, as opposed to those who want outstanding coverage but don't want to pay the price - by offering support to low-income earners in the form of insurance subsidies and a government willingness to pick up the tab for extreme cases - the Obama Administration, in its infinite wisdom and understanding, is instead directly intervening in the functioning of the insurance market in the belief that they can simply define how the market is to work (as opposed to understanding how the market actually works).

After all, that's worked so extremely well with mortgages, hasn't it?

The idea that the government is there to be used as an instrument of social experimentation and control will be the downfall of this great nation. It cannot be such and prosper.

Samstag, Oktober 17, 2009

A Taste Of Things To Come...

Like houses selling for pennies on the dollar...

Take a look here to understand.

Think of it this way: there may be as many as seven million real estate units that will be foreclosed on. Seven million.

Given the results of recent auctions, these will go for a pittance: the problem is not so much that the real estate units are worth so little, but rather that current prospective buyers do not believe that these units are worth anything more.

Given the opportunity to buy real estate - houses, land, commercial units - at a major discount (like 33 cents on the last low market offer dollar), no one is buying.

No one.

Units are going unsold.

What does this mean?

That there is no return.

How can there be no return?

Because the professionals in the business see no way that prices, for at least some types of real estate, will recover at any foreseeable point in the future.

To coin a phase: yikes.

Putting real estate up for auction is like putting something up on eBay with a starting bid of 1 cent.

There are eBay auctions that work wonderfully, with buyers receiving what they want and sellers getting what they want, everyone is happy. It is, basically, the market personified.

I collect watches. One of my small obsessions. I've been recently collecting watches with Hamilton 770 movements, a rather obscure thing to do, given that this was last manufactured in the 1960s and is a simple movement that was perhaps the finest manual-wind movement manufactured in the United States (the Elgin 760 was the finest automatic, but that's a totally different story...).

I've acquired more than a few of them - in fact all - via eBay. This is a movement that was, back then, compared to Patek Philippe, perhaps the finest watchmaker ever. Hamilton was called, back then, the American Patek.

These watches, which sold (in real 2005 dollars) for a couple of thousand of dollars, can be bought nowadays for just a couple of hundred.


Because they're a forgotten movement and are no longer in demand. They once were: Hamilton sold a lot of these watches to companies who gave them to long-term employees, and several that I have are thus engraved.

Prices on eBay are market prices: very few people know how good they are, and even fewer bid for them.

The prices in that link above are market prices as well: they are auction prices, reflecting exactly what something is worth.

Pay attention to auction prices for real estate as this story unfolds: only when these prices pick up is there serious hope that real estate prices will recover.

For until then there is no reason for them to do so...

Freitag, Oktober 16, 2009

What Happens When You Don't Understand Markets...

This is in the WSJ.

The US government - which means the US taxpayers - is responsible, directly or indirectly, for close to two-thirds of all bad mortgages in the United States.


This is what happens when you distort markets for political purposes. To reiterate: the attempts by the US government to spread home ownership downwards along the economic and financial chain distorted market actions and reactions severely, bringing about the real estate bubble we have seen deflate, and the US taxpayer picks up the bill.

Hey, for the politicians it's a win-win situation: they have boasted for the last thirty years that they're helping out the little guy, making those mean and nasty banks lend him money, and now while those actions are killing the financial system because the little guy could never afford them, they're taking credit for saving the system that they themselves created.

The only thing failing for a perfect trifecta is for the government to take over the banks who were forced, by law, to make subprime loans and then need to be bailed out ...


The real story of what is happening here is that the markets have finally reached a point where the system created by the government couldn't work anymore. The current market value for subprime mortgages and their derivatives is virtually nil (actually, there's not much of a market at all, since no one can afford to sell and admit they hold worthless paper...hence there is virtually no supply and hence, while demand is there to pick up distressed real estate at market prices, there are virtually no transactions except at the relatively few auctions around), which is not the market solution that the government and the apologists for this whole system either expected or wanted.

But it is the market solution to the problem. It's just not one that is a very happy one for anyone except those folks who have the capital to buy up distressed real estate.

Right now the banks can't afford to put the assets of their bad loan portfolio on the market the way they should be doing, since it would depress housing prices even further and the cycle of selling assets at a loss, taking write-downs on existing assets and forcing currently performing assets into a debt hole would snowball into further collapse of the housing finance industry (bringing down, as well, the housing market). However, the question then becomes: how long can the banks afford not to do this, given that their bad mortgage portfolios are growing and gradually destroying what equity is left at the banks.

For those in the real world, paying for the win-win situation for the politicians, it's a lose-lose situation that is increasingly destroying local banks, the backbone of the banking system in the US. One might almost be tempted to think that the final result of the current trend - that only those banks "too big to fail" will be left - is actually the desired trend: after all, such banks would be significantly easier to control (given that they are already at least partially owned by the government) and to exploit for personal gain; but this would attribute to those ultimately responsible for this tragedy competence beyond their wildest dreams.

Donnerstag, Oktober 15, 2009

Markets Redux...

This got me to think about markets and what we understand of them.

The readers who understand their economics properly and/or who live in the real world don't need to read any further: this is for those who think that markets are there to be manipulated and played with, that the idea that markets are rational and operate rationally has been proved wrong by the Great Recession, or who need to learn how markets work.

First and foremost: markets are unique for each and every product (but we can generalize). This means that markets are also dynamic and unpredictable, because at the end of the day each and every market simply finds the optimum point where a maximum number of goods are exchanged for a minimum price at a given point in time. Viewed over time, markets will oscillate and move around until an equilibrium is reached. At this point markets are usually mature (or saturated, depending on how you view it) and the price is both clear and transparent: before this point is reached, markets tend to be nontransparent (i.e. you don't know what that equilibrium price is). Talking about market behavior without including time as a variable is like talking about sex without knowing anatomy: perhaps interesting, but ultimately ... unsatisfying.

Second: markets are completely and totally disinterested in intentions and plans: markets take none of that into account, but rather are ruthless, just as the Cold Equations were ruthless. They just are, like the rules of physics and chemistry.

Third: markets rarely make everyone happy. They make only three small subsets of people happy (in decreasing order): those who were able to buy something for a price they were willing to pay; those who were able to buy something for less than they willing to pay, and that tiny, tiny group of sellers who were able to sell something for more than they were willing to accept.

Everyone else? Unhappy, because they either couldn't buy or sell at the prices they wanted. Sellers are left with products that they can't make money with because no one wants to buy them, buyers don't have the objects of their desires.

And this latter point is critical: buyers must desire what is being sold. That is why we can talk about markets for wives, for husbands, for all sorts of human transactions, since services can just as easily be traded as goods are. It also means that market analysis is absolutely critical before making the decision to actually manufacture something: if there is no demand, if no one desires what you want to make, then you're never going to make a living making whatever it is you do.

Fourth: markets don't exist in a vacuum. They are where demand and supply cross. Hence while many speak of markets abstractly, the reality is that, in keeping with the first point made here, all real markets exist in a reality that is controlled by a large number of factors: factors that affect demand, factors that affect supply, factors that put limitations on both (both physical and human), as well as other unique market factors that exist for any single given market. These factors are not directly transferable, but are in many cases extremely close to similar markets, such that people can treat similar markets as being similar, despite differences.

Fifth (and finally): markets react to changes differently than you think. Change demand or supply and the markets will adjust (after all, that is all the markets are at the end of the day). The problem is that while markets react to changes, our understanding of how they change is limited by our in-depth understanding of that model. If we don't understand how a market works, we will be surprised - and invariably disappointed - by market reactions, and indeed fiddling with markets is how we got to be where we are. Moreover, markets may take on absolutely undesired behavior very slowly, taking years or even decades to reach the point where the abused market is extremely undesirable. Markets can also react, however, very quickly and can lead to massive losses (or profits!) when, for instance, a previously nontransparent market suddenly becomes transparent (exposing those who had understood it better for better or worse).

So what's my point?

First and foremost, when politicians meddle with markets - which they truly love doing - they usually do it with a goal in mind: say, for forcing subprime loans to be made, with the goal of improving low-income home ownership in a quest to improve low quality housing (i.e. preventing the urban blights known as slums). However, politicians, blindly subjective as they are, are only willing to believe the direct cause-effect relationship that led them to manipulate markets: taking into account the longer-term effects or the unexpected effect of market manipulation is something that should belong to right and proper due diligence for the government, but which has proven to be impossible to do, given the rewards that can be gained by short-term actions for political gains and the rewards that can be reaped, at least for a period of time, by ignoring due diligence entirely.

The problem also arises when there are external factors that are not included in market calculations, such as the removal of risk when sellers offer massive quantities of goods at prices that do not reflect their "true" value due to, for instance, government risk guaranties or systems of risk avoidance that transfers risk of failure from the individual to the whole (aka socialization of risk).

What I'm trying to say is that markets didn't fail us. Rather, they upset us, upset not only in the sense of apparently pointing out that things we thought were worth a lot were actually worthless, but also upset in the sense that no one wanted the market to develop in the direction it did over time. We thought that subprime loans, securitized, were investments without risk, and are upset that the markets have shown that this is not the case.

Rather, government policies failed the markets: politics trumped economics. Or so they thought: in reality, the piper must always be paid. The cold equations of the market are ignored at your peril, and we are finding out what happens when these equations are ignored.

Bitterly Ironic...

In today's FAZ, on page 1 and 2, there's an article that Russian military strategy is changing.

Russia is, as far as its military is concerned, a catastrophe: they know that their weapon systems lag those of the West significantly (with a few exceptions); they know that they need to have highly trained professional soldiers, but cannot abandon the draft because of the very poor demographic developments; they have extremely long borders to protect with significant disparities between the resource-rich but thinly populated Siberian countryside and the resource-thin but heavily populated countries of North Korea and China.

A fair assessment of the situation is that Russia can easily throw its weight around with someone small, like Georgia; it lacks both the troops and the tail (logistics, etc) for any large-scale conflict.

What makes this bitterly ironic is that the Russians are, strategically, where NATO was in, say, 1955 or so. Facing a potential enemy much larger and better equipped, NATO's policy back then was to initiate use of nuclear weapons in a conventional conflict to ensure that both sides would lose, rather than allowing the option that one side could win.

I'm going to provide a brief translation (mine) that won't cover everything, but will give the gist of the story:

The Secretary of the National Security Council, Nikolai Patruschew, former head of the FSB (the former KGB), spoke in Wednesday with Isvestia about the changes from the last doctrine, which was established in 2000. The trigger levels for possible preventative usage of Russian nuclear weapons are going to be lowered: as the former head of the General Staff, Yui Balujewski, has said, Russia is prepared to protect its large territory with preventative attacks, if need by with nuclear weapons. This now extends to both regional and local conflicts that Russia sees as being a threat to its territories.

At the same time, nuclear weapons and their delivery systems are to be modernized, parallel to the the US-Russian talks about the quantitative limitations to strategic weapons (the follow-on talks to START). This points to a Russian unwillingness, at least in the mid-term, to reduce the number of tactical nuclear weapons, currently estimated to be 2050. Despite the headline articles about plans to reduce strategic weapons, Russian security policy appears to becoming increasingly "nuclearized", and this new military doctrine underscores this.

The reason for this is the status of conventional Russian forces, which have been in continuous decline since the 1990s. The Russian army can, based on its size, still beat smaller enemies with its large amounts of artillery and tanks, as was the case with Georgia. However, a large-scale attack could not be stopped.

In the unofficial scenarios to conventional threats, NATO and the US are increasingly not the potential opponents. Instead, conflicts in Siberia and the Far East have replaced them. Both North Korea and China have large standing armies, and on the Russian side of the border, the country is thinly populated and the Russian military forces there, if attacked, would have a very difficult time defending the country. Russian military commanders in these areas find the Russian worries about the US to be very short-sighted.

Vitaly Schlykow, one of the Russian thinkers behind the planned nuclear forces reform, puts it bluntly: the Russian Army is in an incredibly bad condition, desperately in need of modernization, but even if this happens, defending against a very large conventional attack, say from China, would be impossible without nuclear weapons.

According to Schlykow, the fighting in Georgia showed to Russian leadership, especially the civilian Defense Minister Anatoly Serdyukov, that the Army must be reformed and modernized. According to a study by the Berlin think tank "Stiftung Wissenschaft und Politik" (Science and Politics), this conflict showed that the old-style Russian combat units failed to show the mobility needed: further, modern military operational command and high-tech weapons were not used because the Russian units did not have them.

High-level Russian military officers and politicians called attention to other failings: there was a desperate search for competent commanders, as the vast majority of Russian officers had no battle experience and indeed virtually no leadership experience, but rather managed their units that more often than not only existed on paper. Part of the reason was that most of the Russian military is made up of reserve units that depend on training that more often than not dated back decades. While this means that the Russian military can theoretically call up 20 mn soldiers, the reality is much more sobering. Russian military strategy was trapped in the policies that helped win WW2, which was expected to be the strategy to be used to defeat NATO if it came to a military confrontation.

This is changing: the Russian Army is to be reduced to 1 mn soldiers, down from 1.3 mn currently, with 700 000 Reservists, The number of officers is to be reduced, especially in the higher ranks, by 55%, and 200 000 non-commissioned officers are to build the backbone fo the new Army, this for the first time ever (these jobs were done by officers in the old Russian/Soviet Army). These non-coms are to be trained for 34 months and include new high-tech weapons. This reform is to be completed in 2016.

A further reform is to change the organization and leadership structure of the Army, away from the classic military districts and the organization with regiments, divisions and armies. There are to be only three structures: brigades, operative commands and military districts. Heavy divisions, useful for large operations on a front with hundreds of kilometers, are to be abandoned, as brigades are much more flexible and capable of handling lower-intensity operations. They are to be fully staffed as well, with a high degree of readiness and armed with modern weapons. Each military district is also to receive air mobile units as well. The number of tanks is expected to be reduced from 23 000 to around 2 000.

What makes this ironic is that it is Russia which is now the underdog, as it were, conventionally.

What makes this so bitter is that any lowering of the nuclear threshold is A Very Bad Thing. The problem here is the believability of the Russian threat: are they going to use nuclear weapons to solve a local conflict? Someone will call their bluff, and unless the Russians actually do use them, their believability disappears (and hence the ability to dissuade conflicts!).

This isn't your grandfather's deterrence strategy: this is a new one that really is not going to be a step in the right direction...

Dienstag, Oktober 13, 2009

Oh, The Humanity...

When I first read this, I checked the calendar.

Nope, not the first of April.

I went to the NBER to double-check: apparently this is a real research paper from two people at the Kellogg School of Management at Northwestern and a researcher in Hyderabad, in India.

I'm not about to spend the $5 for the paper. I can imagine a lot better things to do with that five bucks.

Globalization has brought a sharp increase in the developed world's labor supply.

One could say that: it would be sloppy to do so. The labor supply didn't increase due to globalization. Not at all: as a matter of fact, increases in the labor supply are almost always a family decision, and I can't think of too many who say "hey, globalization is cool, let's have a bunch of kids that can grow up and ruin the world economy!"

Uh: no.

Rather, what the authors are trying to say is that the pool of skilled labor has increased dramatically as developing countries develop: duh.

Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago.

It's not so much that labor is being "augmented" and rather much more that unskilled labor in the industrialized countries is a commodity that can be replaced by unskilled labor elsewhere for a fraction of the cost. Skilled labor? Not quite the same. The argument is based on the drops in shipping costs for individual units: when you buy that plush animal from China at your local toy store, the individual shipping cost from China was a tiny fraction of what the domestic shipping was from the wholesaler to the retailer. If so, then following the authors' arguments, the real cause for the world recession is cheap shipping. The Panamax* is the root of all evil!

We argue that the large increase in the developed world's labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession.

Sigh. A classic error: because supply increased, demand increased. Really?

Geo-politics here is the decision by China to open up and try to retain Party control of a capitalist economy (that one's still being worked out: good luck on that idea, Chinese Communists!); technological innovations would probably be the simplified usage of technological equipment in the means of production. While both exist, they aren't the underlying cause of global macroeconomic imbalances: these have everything to do with political decisions taken in the US and elsewhere that blew up.

Further, who has the savings? You do have local savings, but what the authors really are referring to are the financial imbalances that occur when one country exports and the other imports over a very long period of time: the exchange rate is supposed to adjust to cancel this (and left to its own devices usually does, albeit a tad...unpredictably), but since the Riminibi is kept artificially low by the Chinese to ensure competitiveness, the imbalance remains...

The "real" owners of the large currency reserves held by China is the Chinese central bank, not the Chinese workers (unless, of course, you accept the convenient fiction that the Chinese central bank has only the best intentions towards the workers that generated these reserves...).

The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession: The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions.

That's a long, run-on sentence. Let's parse that out:

Because shipping got cheap and all sorts of poor people got jobs making plush animals and the like for the industrialized world, this shock - that production could happen elsewhere - was something that existing institutions in the US and the ROW were unable to cope with.


Now, those workers apparently, nasty little capitalists like they are, saved portions of their income instead of consuming it all (after all, when they poor it was much better: they consumed everything they produced and hence were unable to shock the industrialized countries), and because there was no where for this money to go, it went overseas. Exchange rates didn't adjust to stop this, and all that money made the US go weak at the knees and forget about everything.

So, if the US economy had found better ways of spending all that money, we'd be okeydokey? That crazy idea that the US government should help people who can't afford a house buy them nonetheless didn't have anything to do with that? That the ratings agencies which confused risk with revenue (hey, they both start with "r") didn't have anything to do with that? That the idea that huge leverage was a cool thing didn't have anything to do with that?

Oy vey. Checking the calendar: still not 1 April...

The financial crisis in the US was but the first acute symptom that had to be treated.

Oy vey. Talk about confusing cause and effect...

A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored.

Wait a second...

Okay: let's see if I understand what the authors are really saying...

As long as the industrialized countries could keep developing countries under control (wages down, make sure that the workers couldn't save money), things were fine. Once those workers were able to increase their wages and enter the middle class - defined as that class of workers who have excess income to needs, but who are not yet in the position of living off interest and rents - they ruined everything because they ... invested where the best returns around.

And that once this is reversed, everything will become okay. The imbalances are removed and the right and proper order of things will be restored. Equilibrium rules.


Nope, still not April 1st.

* Panamax= largest ship that can move through the Panama Canal, sort of a standard for large-volume container shipping vessels that move quickly and efficiently to get goods transported. Sort of the backbone of world trade...